Zillow Acquires Trulia For $3.5 Billion

Jul.28.14 | About: Zillow Group, (Z)


Zillow will pay 0.444 of its share price for each Trulia share, which based on Friday’s closing comes in at $70.53 per Trulia share, close to a 25% premium.

Barclays Analyst Christopher Merwin believes a merger would "dramatically increase the combined entity's pricing power."

Around 25% of U.S. real estate agents use Zillow or Trulia, providing a strong outlook for continued market share penetration.

Zillow (NASDAQ:Z) agreed on Monday to purchase rival Trulia (TRLA) for $3.5 Billion in stock. With this move, Zillow will completely dominate the online real estate service, as Trulia was its closest competitor. Zillow will control more than 61% of the online real-estate industry. Zillow will pay 0.444 of its share price for each Trulia share, which based on Friday's closing comes in at $70.53 per Trulia share, close to a 25% premium.

Barclays Analyst Christopher Merwin believes a merger would "dramatically increase the combined entity's pricing power" with real estate agents, and would yield more leverage in price negotiations with MLSs.

Prior to the deal, Canaccord Genuity analyst Michael Graham cited that there is a small number of investors that own both Trulia and Zillow.

"We note that six investors own 52 percent of Zillow and also hold 42 percent of Trulia, potentially reflecting their desire to see consolidation."

Graham predicts and explains how Zillow will benefit from the deal;

"There are 350,000 'thought leading, high-producing' real estate agents in the U.S., only about 25% are using either Zillow or Trulia. That could accelerate to near 80% of those agents in a 'short amount of time'... we continue to be struck by how early the online real estate vertical seems to be in its development."

Zillow's monthly unique visitors climbed 49% year over year during the month of May, while Trulia's jumped 47% during the same time period.

Canaccord Genuity believes that if Zillow and Trulia merge, the synergy would allow for rapid growth, and an increase in the share price over time. Further, Graham suggests that the deal struck between the two companies, "could be quite accretive to Zillow even before factoring in any revenue synergies from pricing power."

The Question of Profitability still remains.

Not all analysts are on board with the deal being such a net positive. Pointing the huge issue of profitability and the proper way for monetization through auction oriented methods. Abe Garver, Managing Director of BG Strategic Advisors and SA contributor said,

"At the end of the day, Zillow and Trulia have to make money (and neither do). Instead of more home search capabilities, the focus here should have been on online auction property broker such as Hubzu.com (parent company Altisource) or Auction.com. Acquiring an online property broker offers the real monetization opportunity (e.g. Zillow could earn a 5% buyer's premium on each transaction)."

"From a M&A perspective we also see active real estate investor communities which represent 20%-25% of the home search market (e.g. Realelfow.com) as great targets since they offer more recurring revenue monetization opportunities."

Advertising Campaigns Can Be Consolidated

Zillow and Trulia planned to spend about $100 million this year on advertising. Zillow started advertising in 2013 for the first time. During 2013, Zillow spent $40 million and saw great returns, as the company now boasts 52,928 Premier Agent Subscribers, a one-year growth of 56%, with an average monthly revenue per subscriber at $286, up 10% since Q1 2013. Revenue generated from Premier Agent subscriptions was $46.2 million in Q1, up 77% from Q1 2013.

Both Zillow and Trulia see that the real opportunity is in mobile. Trulia spent a total of $71.4 million on sales and marketing in 2013. Zacks Equity Research pointed to a possible issue with Trulia's investments in marketing activities. Though the company is increasing the traffic to the site, these investments are decreasing the company's margins. Trulia's operating expenses in the last quarter increased 158.3% year over year, impeding on the 127% surge in its top line, which affected Trulia's bottom line with losses widening on a year-over-year basis. Margins will now increase as the company is no longer competing with Zillow. Trulia's CEO Pete Flint will now report to Zillow chief Spencer Rascoff.

Trulia's Chief Marketing Officer Kira Wampler discusses the companies aggressive strategy towards advertising

"We've got [the product] nailed, now its time to pour on the gas. At the moment no one has run away with the market particularly in mobile."

Zillow has worked out that during the workweek, around 66% of the company's overall traffic comes from mobile devices. That number peaks above 70% for the weekend. Investors can see why both Zillow and Trulia are going after the mobile market. Further, this points to a key aspect that could be leveraged if the two companies merged. They are both spending the same ad dollars going after the specific market, but more importantly they are changing the way that home buyers and sellers are looking at the real estate market. Zillow's Chief Marketing Officer, Amy Bohutinsky explains this trend in mobile;

"This is the way people shop for homes today. So to fuel this advertising campaign, we did, and continue to do, an enormous amount of research where we talked to buyers around the country, asking them what's important to them when they shop for a home? We heard loud and clear from people. Mobile is a big part of that home search, because they're fitting it in when they're at work, when they're on the bus, when they're sitting in bed at night on their iPad, showing it to their spouse."

The companies were targeting the same market, now they will combine their forces, as the two industry leaders become one. This deal will help Zillow continue to grow in an industry that is still in its infancy. One can imagine the talks between former rivals about what tactics worked for each company on improving mobile services and acquiring premium agents. In turn, this will provide Zillow, and former Trulia shareholders, with great management, important strategies, and valuable synergies that will create larger market share and greater profits as Zillow moves forward.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.